Why The Stock Market Rallies Despite Worries

The fiscal cliff, tax increases, the debt ceiling, missed earnings - investors
certainly have had much to worry about lately. So why in spite of these fears
has the market continued to rally?

There's a Wall Street bromide that succinctly answers this question: "Bull
markets climb a wall of worry." Fear tends to fuel higher prices when internal
momentum is rising due to short covering and other technical factors. It's
normally not until everyone has entered the market that the market finally
tops out.

Many are wondering why the market has been so strong in the face of all these
potential pitfalls. The best answer I've heard for this question to date is
that the U.S. stock market is the "best horse at the glue factory" so to speak.

As one newsletter writer pointed out, "Pension plans get contributions every
month and have to invest them. Individuals are saving money and they have
to invest it. And high yielding bonds and CD's from yesteryear are maturing.
What are your investment options?" Certainly not low-yielding CD's and Treasuries.
Moreover, the dividend yield on the Dow was recently as high as 2.6%, well
about the yield on a 10-year T-Bill. In other words, the U.S. stock market
is winning the race for investors' dollars by default.

On the investor psychology front, the latest AAII investor sentiment readings
have been at their most enthusiastic in several months. The percentage of
bullish investors recently hit 52%, the highest bullish reading since last
February 8. Bullish readings above 50% often signal market tops, or at least
serve as preliminary warnings that a top is ahead. I would point out, though,
that last year's (Feb. 8) 52% bullish reading in the AAII poll was followed
by nearly two more months of higher prices in the S&P before a sizable
correction occurred.

Along with increasing investor enthusiasm has come an increase in equity market
inflows. CNNMoney pointed out recently that investors poured a record $8 billion
into U.S. stocks at the start of 2013 after removing more than $150 billion
from U.S. stock mutual funds last year. According to the Investment Company
Institute, the $8 billion investors put back into stocks as of January 9 was
the highest amount within a short space since ICI first began keeping records
in 2007.

As Hibah Yousuf of CNNMoney wrote, "The massive inflow represents a significant
departure from the recent trend of investors fleeing the stock market." Along
these lines, Art Huprich, chief technical analyst at Raymond James asks, "Is
there a slow yet marginal shift out of fixed income and into equities taking
place?" It's still early, but it's beginning to look that way. Assuming this
trend continues it would certainly jibe with our Kress cycle "echo" forecast
for 2013, which concluded that this year would likely resemble 2007 in many
ways. In other words, 2013 could prove to be a major topside transition year
with some major ups and downs along the way as investor bullish sentiment
reaches a crescendo.

In the meantime, it will do well to keep in mind the famous saying of the
venerable Charles Dow: "Neither the length nor the duration of a trend can
be forecast. The best we can do is identify trend changes and act accordingly."

U.S. Economy

The Bureau of Economic Analysis said fourth quarter GDP contracted by 0.1%,
which represents the first such contraction in over three years. Most of that
contraction was due to a 22% decline in government defense spending, however.
Personal consumption expenditures, accounting for 70% of GDP, rose 2.2%. This
is more in line with the New Economy Index (NEI) which rose to a new high
last week. According to Briefing.com, this was also the largest quarterly
uptick since a 2.4% increase in consumption was reported during the first
quarter of 2012.

The NEI chart shown above is the true reflection of the U.S. retail economy.
It's telling us that consumers are still spending and show no signs as yet
of letting up. We haven't seen an economic "sell" signal in this indicator
since the early part of 2010. It's possible, however, we could see one at
some point later this year as the economic headwinds begin to increase.

Gold

Speaking of economic headwinds, these include the Congressional battle over
the U.S. debt ceiling, a potential downgrade of the U.S. credit rating by
Moody's, the continued weak labor market in the U.S., trouble in the Middle
East and North Africa, and the coming implementation of Obamacare. Each of
these factors, if not offset by an equally positive event, could prove sufficient
to galvanize a gold rally at some point.

On the subject of the U.S. credit rating, the editors of The Kiplinger
Letter concluded that if Moody's or Fitch Ratings were to downgrade
the country's debt, banks, insurers and others "may need to shuffle some
assets around. If Treasury holdings no longer qualify as ultra-safe, other,
high-risk investments may need upgrading to toe the line on statutory capital
standard requirements." Kiplinger also suggested that this could
cause some erosion of the dollar's status as a reserve currency. Such a
development would likely prove favorable to gold.

One person who believes gold will have a good year in spite of the negative
investor sentiment is Rob McEwen, chairman and CEO of McEwen Mining (MUX).
According to McEwen, gold tends to have a positive performance in the year
following a U.S. presidential election. He points out that in the seven electoral
contents from 1984 to 2008, gold climbed by as much as 85% in the year after
the election. The yellow metal suffered only one decline in that span, a 36%
drop in 1997, the year following Bill Clinton's second election victory.

McEwen also noted that gold stock prices as measured by the Gold Silver Index
(XAU) fell in all presidential election years dating back to 1984, including
last year, when the index declined 8.3%.

We're currently in a cash position as we await the next confirmed buy signal
from our indicators for gold.

2014: America's Date With Destiny

Take a journey into the future with me as we discover what the
future may unfold in the fateful period leading up to - and following - the
120-year cycle bottom in late 2014.

Picking up where I left off in my previous work, The Stock
Market Cycles, I expand on the Kress cycle narrative and explain how
the 120-year Mega cycle influences the market, the economy and other aspects
of American life and culture. My latest book, 2014: America's Date With
Destiny, examines the most vital issues facing America and the global
economy in the 2-3 years ahead.

The new book explains that the credit crisis of 2008 was merely
the prelude in an intensifying global credit storm. If the basis for my prediction
continue true to form - namely the long-term Kress cycles - the worst part
of the crisis lies ahead in the years 2013-2014. The book is now available
for sale at: http://www.clifdroke.com/books/destiny.html

Clif Droke is the editor of Gold & Silver Stock Report, published
each Tuesday and Thursday. He is also the author of numerous books, including
most recently, "2014: America's Date With Destiny." For more information visit www.clifdroke.com

Clif Droke is a recognized authority on moving averages and internal
momentum. He is the editor of the Momentum Strategies Report newsletter,
published since 1997. He has also authored numerous books covering the fields
of economics and financial market analysis. His latest book is Mastering
Moving Averages. For more information visit www.clifdroke.com